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Let us briefly #Reflect on the #SARB's first #MPC #Meeting of 2020 and their #MonetaryPolicy decision to cut rates by 25bps from 6.5% to 6.25%...
Everyone with some interest in such matters is without a doubt already aware that the #SouthAfricanReserveBank's #MonetaryPolicyCommittee cut its key #PolicyRate, the #Repo by 25 basis points from 6.5% to 6.25%. The move can perhaps best be summarised by the following statement:
It is clear from the statement above that the SARB moved on the back of a growth story. They would want to see the level of #inflation creep closer to 4.5% but they didnt tighten to achieve this end. Rather, they provided more accommodation for growth & inflation might pick up...
From a #CommonMonetaryArea #CMA angle, from a #Lesotho's angle, a client country & signatory of the #CMA agreement, it is worth reflecting why it is important for us to get some sense (or handle) of where the #SARB will take rates or how they will decide monetary policy stance..
#Lesotho operates under a #FixedExchangeRate regime wherein its currency, the #loti is pegged at par with the currency of its anchor economy (#SouthAfrica), the #rand...
Under this setup, #Lesotho has to back each unit of its #currencyincirculation with reserves of the target currency (in our case, reserves are denominated in #USD but the rand constitutes the largest proportion of #foreign #currencies in the basket)...
In essence, this arrangement automatically ties #Lesotho's IinterestRates to those of #SouthAfrica. For #MonetaryPolicy purposes, #OpenMarketOperations are undertaken in #Lesotho to stave off possible down side risks to the net international reserve position...
This implies that #Lesotho's interest rates would most likely have to be higher than #InterestRates of #SouthAfrica because of the risk premium & as a way to attract foreign currency (via #investment)...
With all this said, the rates between the two countries have to co-move. Meaning, the likely (or actual) direction of the #SARB #MonetaryPolicyCommittee (and thus their rates) is very important to #Lesotho's #Financial sector and #Economy at large...
In closing, sorry to sound like a #Ludacris song but it wraps up the relationship between the #SouthAfricanReserveBank and the #CentralBankofLesotho beautifully... WHEN THEY MOVE WE MOVE (Just Like That)...!
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